Secretive clique felt it was untouchable

The team of four National Australia Bank traders suspended last week for unauthorised trading were aggressive, fiercely loyal to the man who hired them, global head of foreign exchange Gary Dillon, and, in return, received some of the biggest bonuses in the bank, sources familiar with the bank's forex operations said yesterday.

Mr Dillon is believed to be the man who designed and built NAB's currency options risk management system.

The sources said he was also interested in taking responsibility for risk management.

There is no suggestion Mr Dillon knew about the unauthorised trading nor has he been suspended following discovery of the losses.

NAB yesterday refused to comment in any way on any of the bank's employees, suspended or otherwise.

The sources have commented on the intense loyalty that bonded Mr Dillon, his team leader and senior dealer Luke Duffy, the team's second-in-charge David Bullen, and traders Vince Ficarra and London-based Gianni Gray, giving the group a sense of security and an attitude that they were "untouchable and infallible", a "secretive clique".

They say that Mr Dillon's endorsement of the aggressive way in which the team traded currency options was interpreted by the traders as protection against criticism and any possible retribution.

The attitude is understood to have persisted even when the team's risk-taking was questioned by other traders in the Australian market as long ago as April 2002.

It is believed currency options traders working for one of NAB's competitors warned in April 2002 about the repercussions of a single large position the NAB team had taken in New Zealand dollar options.

It is unclear what action, if any, was taken in response to this warning.

The traders' attitude of infallibility may go some way to explaining why one of the team, Mr Bullen, has told journalists he believed the bank knew the team had exceeded the value-at-risk limits NAB applies to derivatives trading.

Mr Bullen has also said the currency options desk had earned between $25 million and $45 million each year for the past three years for the bank, making it the most profitable currency options team in Australia.

A Buddhist, he confirmed he was paid a $200,000 bonus in January.

It is understood Mr Duffy collected $250,000 at the same time and Mr Dillon $500,000.

Sources say the team operated with such an air of exclusivity that it created a split between them and other bank departments, as well as with rival currency options trading teams at other banks.

It is understood the team's insularity was created in the first place by the circumstances of at least one of their hirings.

Mr Dillon, Mr Duffy and Mr Gray all worked together on the currency options desk at Commonwealth Bank.

It was a matter of weeks after being appointed as NAB's global head of currency options in August 1998 that Mr Dillon recruited Mr Duffy.

It is understood that when CBA revalued some of Mr Duffy's trades, the bank was $10 million worse off.

NAB is in the process of revaluing trades conducted by Mr Duffy and the other traders since their suspension.

The loss will lie somewhere between $185 million and $600 million, taking into account a series of what NAB says were fictitious trades used to mask losses that accumulated since last October.

Mr Dillon is believed to have hired Mr Gray out of CBA in 1999 and Mr Bullen, previously an NAB trader, in 2000.

It is understood Mr Duffy and Mr Bullen also received promotions when Mr Dillon was made joint global head of foreign exchange in 2002.

Mr Dillon is understood not only to have designed and created NAB's currency options risk management system but to have asked to take over responsibility for the back office.

Such a merging of front and back office functions goes against all business philosophy and regulation, which promotes the separation of trading and checking systems.

Such separation is supposed to allow the checking of trades to take place by objective sources.

In the wake of the trading scandal, NAB's risk management system is now being scrutinised by investigators, regulators and investors.